I’ve spent a lot of time on thinking, writing and public speaking about the fiduciary rule and a recent client comment clarified a point for me. He argued that the Department of Labor fiduciary rule was unnecessary because poor products or services are eliminated through competition in the marketplace. “You can’t survive if you don’t take care of your customers,” he explained.
He knew that from his own marketing career and we all see it daily among other quality businesses. Companies and salespeople must deliver to prosper, and keeping the customer happy is key to long-term success. (For more, see: DOL Fiduciary Rule Explained as of July 5th, 2017.)
The Investment Business Is Different
So, it might be easy to assume that anyone who has been in the investment or insurance business for a long time must have satisfied clients and top quality products. But there are some important distinctions in the financial services industry.
- What a client wants may not be best for him or her. Everyone wants high returns with high safety, but investing always involves trade offs. Clients need to reach informed decisions after seeing all the options.
- Visual clues aren’t reliable. Advertising can make a bad product look good. A charming salesperson can be manipulative and deceptive. A big or prestige office can seem falsely safe and reputable.
- Products are complex. Even something as simple as a stock or bond requires a prospectus running dozens of pages. An annuity can be so complicated that the salesperson doesn’t understand it. How in the world will the customer?
- Big producers may not need “long-term” success. The sales commission on a single large annuity can run $50,000.00 or more and, once sold, there is little need for ongoing contact with the customer. By the time the customer has questions or concerns, that agent can be long gone.
- The future is uncertain. Nobody knows what the future holds. There are times when doing the right thing brings the wrong results. The opposite is true, too. How does a customer evaluate some past action if the right choice earned the wrong result?
In other words, an assumption that seasoned salespeople offer quality services and products can be very wrong. The easiest and fastest way to make money in the investment business is to sell people what they want. Attempts to inform or educate can actually antagonize some potential customers. Often, a professional offering the genuinely best solutions can be outgunned by deft and persistent salespeople. (For more, see: The Fiduciary Rule: What it Means for Investors.)
Investment Customers Don’t Know What They Don’t Know
Additionally, many customers aren’t good at evaluation. Because of both complexity and uncertainty, they rarely have a reliable picture of how they’ve fared. If they have an ongoing relationship with a broker or agent, clients tend to trust the message they hear. “Your investment did well this year,” is rarely met with proper skepticism or questions, even when it’s a bold lie.
Early in 2015, The White House released a report titled, “The Effects of Conflicted Investment Advice on Retirement Savings.” Commission-based advisors, per the report, put retirement clients at risk because they impose sales charges and don’t offer an objective viewpoint on investment products they sell.
That report said that investors who took conflicted advice might see up to a 12% loss in potential growth in their IRAs over a 30-year period. The report pegged past overcharges on retirement investments at 17 billion dollars. $17 billion.
Surprisingly, most of those clients never even knew they were victimized. Most would probably describe their advisor, broker, or agent as helpful, professional, and competent. For all the reasons above, clients weren’t in a good position to effectively evaluate the products and services they bought and they paid way too much.
It's Time for a Better Way
I don’t believe that all professionals working with the old “suitability” standard are bad. Many of those people are doing the best for their clients within the constraints imposed by their company or industry. However, in almost every case, there were better products, services, and pricing available somewhere else. And their customers never even heard about other options.
The fiduciary rule has been a long time coming. Like many other advisory firms, ours has been acting in our clients’ best interest all along. Sometimes, we’ve been out maneuvered by inferior companies and products. Sometimes, well-intentioned competitors foisted awful products on our clients. Occasionally, they weren’t well intentioned and they probably knew the products were awful.
I believe it is time to level the playing field and I am grateful the rule is being implemented. It’s time for non-fiduciaries to step up. Their customers deserve better treatment. (For more, see: Why an Independent Investment Advisor Makes Sense.)